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“We’re yet to see the details but anything which affects cash flow for builders will increase development costs," he said.

“A bank guarantee would be a great option for some of the larger developers but for smaller builders it impacts on how much the bank will lend them for other projects."

NSW Master Builders Association housing director Peter Meredith said the bond would be a disincentive to build in NSW. “It sends a message that cost of building in NSW is 2 per cent higher than any other jurisdiction in Australia," he said.

Mr Meredith said smaller builders would be hardest hit as they would have to pay for the bond through borrowed funds, which then adds more cost. “I understand the intention of it but ultimately the costs involved are passed on to the purchaser," he said.

Urban Development Institute NSW chief executive Stephen Albin agreed the move would add costs, but said the industry would be able to adjust.

“In the absence of warranty insurance for projects higher than three storeys, I think it will ultimately be a good thing," he said.

Mr Albin said the bond would encourage more scrutiny during construction, particularly during the waterproofing stages that often result in defects well after ­completion.

NSW Fair Trading Minister
Anthony Roberts
said disputes involving defects would be reduced and the bond offered better protection for consumers and more certainty for developers.

The strata position paper said buyers have the right to expect their unit will be defect-free and that they will not have to pay to fix defects. The state government hopes to have the changes legislated by mid-2014.